S&P says ship operators face refinancing, default risks

Friday, April 05, 2013

Global ship operators face significant refinancing and default risks as a result of tightening bank funding, enormous industry overcapacity, and depressed global trading conditions, Standard & Poor's said.
A report published this week by the rating agency, Global Ship Operators Scramble For Liquidity To Stay Afloat, noted “ship charter rates have fallen in parallel with declining economic activity. High operating costs, particularly for fuel, are also eating into their earnings. At the same time, a lack of supply discipline in this fragmented industry means that ship operators accelerated ordering new vessels in years when shipping markets flourished. These vessels are now hitting the water at a time when trade demand is subdued.
“Adding to these difficulties, ship operators are now finding it increasingly difficult to raise capital for new ships and to refinance existing loans. Banks, faced with their own financial difficulties and a riskier shipping industry, are imposing tougher conditions for lending and charging higher premiums. Some are even exiting ship financing,” S&P added.
S&P posted a related video interview with primary credit analyst for the report, Izabela Listowska, on its CreditMatters TV site, titled "Challenges and Tough Conditions Faced By Global Shipping Industry."
S&P said the tanker sector “could start to see some improvement in charter rates, and therefore in profitability, the soonest because of more favorable demand-and-supply conditions," while the dry bulk and container sectors “will continue coming under pressure for longer.”
The rating agency said it expects container trade volumes will rebound to 5-6 percent in 2013, but that new vessel deliveries will outpace demand well into 2013.
It called the supply of very large containerships “alarming,” noting they will expand by a large annual rate of close to 20 percent during 2013 and likely in 2014.
“Given that market conditions are extremely fragile, we believe that, to keep the industry in the black, leading container operators will have to maintain stringent capacity management and pricing discipline. We assume that freight rates will remain fairly flat on average in 2013. In our opinion, Asia-U.S. and transatlantic lanes have better underlying fundamentals than Asia-Europe routes thanks to a lower supply pressure. Hence, we forecast more favorable trends in rates for the U.S.-related trades while we assume a moderate dip in rates on the Asia-Europe route.”
S&P said bank funding for ships is “becoming increasingly scarce, expensive, and of shorter tenor.”
“We anticipate that most European banks, the traditionally dominant ship financiers, will continue reducing their exposure to the shipping industry because of their own internal issues, such as scarcity of capital, changing regulatory capital rules, and relatively high funding costs,” it said.
S&P noted last June the French bank Societe Generale sold the vast majority of its shipping portfolio to Citigroup and Germany’s Commerzbank, with a $20 billion loan portfolio, exited ship finance. “This has raised concerns from industry experts that other banks with shipping portfolios might follow,” S&P said. - Chris Dupin